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£550,000 a year service charge?

When the report of the Supreme Court’s decision in Arnold v Britton and others [2015] UKSC 36 landed on my desk, I was not surprised by its content. The decision upheld the ruling of the Court of Appeal that Service Charge provisions are no different from any others in their interpretation; namely that the law will not help you escape a bad bargain.

The decision in Arnold v Britton means that residents of a holiday park are set to pay upward of £550,000 a year in service charge by 2072. This is owing to a clause that stated that the fixed sum service charge was to increase by 10% each year.

Ten percent, if the service charge was £99 a year (as in this case), seems fair until you put it into the context of a 99 year lease. I am reminded of the story of the man who invented chess, who requested payment from the King of only 1 grain of rice to be placed on the first square of the chess board and then two on the second, four on the third and doubled to the next square until the 64 square chess board was full. This amounts to 18 billion billion grains of rice... and the man was promptly executed. Now, in the case of Arnold v Britton, the tenants could not execute their landlord and so it was in the hands of the court to decide their fate. The Court stated that commercial common sense was not to be applied to the clause or diminish the language of the provision. The main crux of the decision is that just because the effect of the provision has disastrous consequences for one party, it does not mean that the court should depart from its true meaning.

Clearly, commercial common sense would dictate that the tenants could not pay £550,000 per annum in Service Charge. Although when drafting the clause it was unlikely to be the intention that the service charge was to reach £550,000, it was drafted to take into consideration the rising costs of services and the associated inflation and it is not unlikely that costs will increase by 10% in a year. However, as the King found out above, it is not always easy to appreciate the full commercial implications of an exponentially increasing sum of money (or rice).

This case shows how important it is to consider the commercial implications of a clause in a lease; what may appear fair today, may not be fair at the end of the lease, whether the term is for 9 years or 99 years. It is therefore important to get proper advice from a professional on what the terms of a lease could really mean, now and in the future – doing so, could just save you £550,000 a year.